Former Treasury Secretary Lawrence Summers has urged the Securities and Exchange Commission (SEC) to conduct an investigation into the historic surge in the Cboe Volatility Index (VIX) that occurred on Monday.
What Happened: Summers speculated that the unusual VIX movement could be due to the influence of illiquid instruments used in its calculation.
The VIX, often dubbed the “fear gauge,” is a barometer of anticipated stress in U.S. equities. Amidst a sharp selloff in stocks on Monday, the VIX saw an unparalleled surge, soaring over 65, a level that signals extreme investor panic.
According to the report by Bloomberg, experts suggest several technical factors, such as a lack of liquidity, short covering in misfired volatility bets, or the way the gauge is calculated, could have played a role in this surge.
"My understanding is that because there are some illiquid instruments that go into the calculation of the VIX, the VIX had a somewhat artificial move on Monday," Summers said.
Summers emphasized that the SEC and the relevant exchanges should not overlook these issues. The SEC, the Commodity Futures Trading Commission, and the CBOE have not yet issued any statements regarding this matter.
"Since that is so widely watched an indicator, issues of liquidity, issues around how it settles, I think should be studied by the relevant parties in the industry and the regulator — the SEC," he added.
"If one looks at the VIX futures, which are a somewhat different instrument, the movements were much, much less dramatic. The SEC and the relevant exchanges may want to pay a bit of attention," Summers said.
Why It Matters: The unprecedented surge in the VIX is a matter of concern as it reflects heightened investor anxiety and potential market instability. The call for an investigation by a former Treasury Secretary underscores the seriousness of the situation.
If the SEC finds any irregularities in the VIX’s calculation or manipulation, it could lead to significant changes in the way the index is computed or regulated.
This could have far-reaching implications for investors who use the VIX as a key indicator of market volatility.
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This content was partially produced with the help of Benzinga Neuro and was reviewed and published by Benzinga editors.
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